BackUS Fed meeting decision today: PIMCO warns market is underestimating risk of US recession and rate hikes
PIMCO warns of US recession risk and expects another rate hike from the Fed, prompting a preference for safe-haven assets.
PremiumPacific Investment Management Company LLC (PIMCO) believes that the market may be ignoring the risk of at least one more rate hike from the US Fed before the year-end and a looming US recession. At this juncture, safe-haven assets may be preferred plays.
"Markets may be underestimating the risks of both a US recession and one more interest-rate hike from the Federal Reserve, making haven assets a preferred play," Bloomberg reported, quoting PIMCO saying so.
"There’s still a fairly elevated chance of another hike before the year-end. Higher for longer is likely the mantra for US rates as inflation will remain a little bit stickier than expected," Bloomberg quoted Geraldine Sundstrom, a managing director and portfolio manager in PIMCO London office, saying so.
Sundstrom, as per Bloomberg, is slightly cautious about the US economy. “Soft landing is definitely possible. A mild recession is also a decent probability," she said, as per Bloomberg.
Her strategy for the current environment is "sticking to safe assets that offer a pick up in yields, including US agency mortgages and some financial credits," Bloomberg reported.
Fed likely to maintain a pause today
It is widely expected that the US Federal Reserve will opt to maintain its current interest rates as it announces its policy decision later today.
The two-day Federal Open Market Committee (FOMC) meeting began yesterday (September 19) and its outcome is due later today (September 20).
The US Fed has been raising rates since March 2022 and this could be the second time since then that the Fed may maintain a pause on interest rate hikes.
Markets across the globe will closely watch what the US Fed Chairman Jerome Powell says about inflation and the US economy.
The market might have discounted the possibility of a pause by the Fed in September. So, the market may not react to the move. However, the Fed Chair's commentary on the inflation trajectory and growth will be closely observed by the markets.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services believes the Fed will likely hold rates this time but the tone of the Fed commentary will likely be a bit hawkish since inflation continues to be high despite some easing.
He anticipates one more rate hike of 25bps in the next meet and a hold thereafter.
"The Fed always responds to incoming data. However, the current trend indicates the possibility of a rate cut only by the second quarter of the next year (Q2CY24)," said Vijayakumar.
He pointed out that the markets have already discounted this expected scenario. The positive response of the US market and consequently other markets, too, is in response to the US economy’s soft landing scenario.
"Markets will remain stable so long as this soft landing scenario holds," he said.
Read more: How will the US Fed interest rate decision impact the stock market?
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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